Accounting for Materials Flashcards
(32 cards)
What are the different types of inventory?
- raw materials
- spare parts/consumables
- work in progress
- finished goods
Why do businesses need to control inventory?
- holding costs may be expensive
- production will be disrupted if run out of raw materials
- unused inventory with short shelf life may incur unnecessary expenses
What processes are included in inventory control?
- ordering
- purchasing
- receiving goods in store
- storing
- issuing inventory
- controlling levels
Purchase requisition and controls involved
- issued by warehouse to purchasing department for new order
- must be authorised within limits
Purchase Order and controls involved
- PO raised and sent to supplier, accounts, warehouse detailing order
- use preferred suppliers who are trustworthy and reliable or ask for quote first
Delivery Note and controls involved
- must be signed to confirm delivery is as expected
- when invoice paid for this is matched with PO and invoice received
Materials Requisition note and controls involved
- raised by production team to warehouse team when materials required
- can be reversed with material returned note
- either over ordered by accident or to ensure enough
What is the double entry for when an issue is made to a production process?
DR production process/WIP
CR materials inventory
Periodic Stocktaking
all inventory items counted and valued at set point in time
- usually at end of accounting period
Continuous Stocktaking
- counting and valuing selected items at different times on a rotating basis
- team will count and check each team different items so over year all done
- valuable or high turnover items checked more frequently
Free Inventory =
= materials in inventory
+ materials on order from suppliers
(materials requisitioned but not yet issued)
- represents what is really available for future use
What are stockout costs?
- costs of running out of inventory
- loss of future sales/reputation
- cost of production stoppages
- staff frustrations
Reorder Level =
= maximum usage per day x maximum lead time
- when this is reached, a new order should be made so that in theory shouldn’t ever run out
Minimum Level =
= reorder level -
(average usage per day x average lead time)
- inventory shouldn’t fall below, acts as warning
- buffer inventory
- safety inventory
Maximum Level =
= reorder level + reorder qty
(min usage per day x min lead time)
- inventory should not rise to, warning sign that uneconomical
Average Inventory =
= min inventory + 1/2 reorder qty
- assumes that inventory fluctuates evenly between min and highest level (immediately after order received)
Purchase Costs =
= purchase price x annual demand
= P x D
- unaffected by inventory policy unless bulk discounts available
Ordering Costs =
= cost per order x number of orders per year (demand/order qty)
= C0 x D/Q
- if fixed amount per order charged then total ordering cost will be affected by inventory policy unless bulk
- if amount per unit charged, cost will be fixed per year as only depends on purchases level
Holding Costs =
= cost of one unit for one year x average inventory throughout year (order qty per order/2 + min inv.)
= CH x (Q/2 + min inventory)
- some fixed per year costs and other costs varying with number of units
Total Inventory Costs =
= ordering costs + purchase costs + holding costs
= C0D/Q + PD + ChQ/2
EOQ =
- minimises total cost
- economic order quantity
= v 2C0D/CH
- this will balance holding cost to order costs so they are equal
What are the assumptions of the EOQ models?
- demand is constant
- delivery is instantaneous or lead time constant
- purchase costs are constant (no discounts)
What is the process for working out EOQ when bulk discount are available?
- work out EOQ without discounts
- work out EOQ if it falls within discount band (if have to order over 150 but EOQ was 160)
- Work out annual costs for each discount
- select order qty with minimum total cost
When is EBQ used?
- when resupply is replenished gradually to match production rates
- determines number of units can be produced in given batch at min average cost
- minimise admin, holding costs and guarantee future supplies
